How to trade cryptocurrency using fundamental analysis
This guide provides a detailed overview of the top tools and techniques of how to trade cryptocurrencies using fundamental analysis and in turn make a profit.
Trading in the cryptocurrency markets can be very daunting due to the infancy of the cryptocurrency space and the lack of a long history, which typically acts as a solid foundation for traders to build decisions upon. In traditional markets such as the stock market people do not base their trading decision solely on the technical side but make use of fundamental analysis techniques as well. However, a vast amount of cryptocurrency traders lack or dismiss the importance of fundamental analysis whilst trading cryptocurrency, this is why we have created a comprehensive guide to help you trade cryptocurrencies using the fundamental information available at this moment in time.
What is cryptocurrency fundamental analysis?
Before we go any further it is important to define the term “cryptocurrency fundamental analysis”. Cryptocurrency fundamental analysis is a forecasting method used to predict the price of a digital asset (cryptocurrency) usually in the mid to long-term. This method does not rely so heavily on the exact price at the moment but considers all the available information about that particular cryptocurrency and all the current and future factors that may influence the price.
Traditionally fundamental analysis is useless in short term. Stock investors for example apply this forecasting method to get the general picture of an asset’s value. In the case of cryptocurrencies, it can be seen as of little importance as to predict too far into the future as cryptocurrency markets changes in a very fast manner, thus whilst using cryptocurrency fundamental anaylsis we tend to focus in the range of mid to long term.
The following four points are traditionally used to summarize the workings and reasoning behind fundamental analysis:
- The price of every asset changes due to a specific reason.
- We can find this reason by analysing the asset and its interactions in detail.
- Any news, rumours or events has consequences which can affect the price of the asset.
- If one person knows all the facts and can make the right decision, that person is able to predict future price of that asset.
The above points relate to the cryptocurrency trading space as well, however, some traditional methods inside fundamental analysis needs to be changed to analyse crypto specifically. New tools need to be developed and the needed data and information is found in a variety of different areas.
Cryptocurrencies are similar to both currencies and stocks and thus has a combination of both’s features alongside the new features discussed above. All those specific features affect cryptocurrency fundamental analysis and make it unlike anything we had before.
Where to get your fundamental information and its importance
Looking at traditional investments such as stocks for example, fundamental analysis entails evaluating the financial health and viability of a company according to the contents and conclusions drawn from its financial statements, usually made available to the public by the company. If the conclusions look promising, meaning the company is in good financial health and growth is almost guaranteed, we state that the company has good fundamentals and we can, therefore, invest in it.
In the cryptocurrency space however, performing fundamental analysis is radically different due to the fact that there are no financial statements. This is due to the following reasons:
- A Cryptocurrency is not a corporation. Cryptocurrencies are not based on generating revenue such as corporations but is rather seen as a store of value within a network.
- Cryptocurrencies do not have a long history. Due to the infancy of cryptocurrencies, almost all cryptocurrencies are in their development stage. This means that there are limited adoption and a limited track records available.
Due to the above-mentioned reasons, fundamental analysis of cryptocurrencies must be performed with a different methodology. A good understanding of a cryptocurrency’s fundamentals allows you to form your educated opinions and have data and information backing it, which is rare in the crypto world due to its complexity.
Here are a few ways on where to begin your fundamental analysis:
- Cryptocurrency’s white paper
A cryptocurrency’s white paper is a detailed proposal, usually written or typed out, by the cryptocurrency’s development team. This paper outlines the purpose and ‘internal workings’ of the specific cryptocurrency and represents the main source of evaluating the fundamentals of the cryptocurrency. The white paper is one of the first things you must read while performing fundamental analysis on specific coins or tokens. Note that these papers can get very technical, it is good idea to understand the jargon if you are going to read these.
- Cryptocurrency’s website, channel or blog
One of the next places you as an investor or trader would want to have a look at is the cryptocurrency’s website, channel or blog, depending on the platform used by the userbase. This could represent the official and main channel of communication of the core development team. Our cryptocurrency market cap is the best all-in-one tool to keep in the loop on any specific cryptocurrency activity, news or any form of communication.
These channels could also be on platforms such as Telegram, WhatsApp or Discord channels and it is necessary to join them and ask questions to get more information on the cryptocurrency you are analysing. This is also a great way to interact directly with the developers and find out if they are trusted and moving the cryptocurrency forward. Be sure to follow the updates given by the developers in their official blog to track the progress and see if the developers are truly following their roadmap usually found on their website.
- Community Forums
This is probably one of the places traditional investors would’ve never considered on gathering information for their fundamental analysis but in the cryptocurrency space, forums are a great way to get a better understanding of the cryptocurrency, as well as the sentiments surrounding the cryptocurrency. This is also a great platform to speak with other possible investors in the cryptocurrency space and discuss and share information with each other.
What to look for in projectsNow that you know where to find the information or data on a specific cryptocurrency you are analysing. The next step entails which questions to ask and which information to look at whether to decide fundamentally if the cryptocurrency you are analysing is a good investment. Here are a few attributes to look at to determine whether it is a good investment or not:
- Long-term Scalability
- Trust-less decentralization
- Usefulness of the cryptocurrency